What are Non-Convertible Debentures (NCDs)?
In the world of finance, Non-Convertible Debentures (NCDs) stand as a prominent player, offering companies a means to secure funding while providing investors with a fixed income opportunity. NCDs have gained traction in India's financial landscape due to their distinct characteristics and the benefits they offer.
Let us look at NCDs, their features, and the types found in India.
What is a Non-Convertible Debenture (NCD)?
Non-Convertible Debenture, or NCD, is a debt instrument issued by companies to raise capital from the market. Unlike convertible debentures, NCDs do not possess the provision to be converted into equity shares.
Instead, they promise investors a predetermined interest rate along with a specific maturity period, during which the issuing company disburses regular interest payments to the debenture holders.
Key Features of NCDs:
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Fixed Interest Rates: NCDs offer a fixed rate of interest throughout the tenure of the debenture, providing investors with a stable income stream. This feature makes NCDs an attractive investment option, especially for risk-averse individuals seeking consistent returns.
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Regular Interest Payments: Investors in NCDs receive interest payments at regular intervals, which could be monthly, quarterly, or annually, depending on the terms of the debenture. This predictable cash flow can be beneficial for retirees and those looking for periodic income.
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Maturity Period: NCDs come with a predefined maturity date, after which the issuing company returns the principal amount to the debenture holders. This allows investors to plan their investments and financial goals accordingly.
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Seniority in Payment: In the event of a company's liquidation or bankruptcy, NCD holders are typically given preference over equity shareholders when it comes to repayment. This seniority in payment enhances the security associated with NCD investments.
Types of NCDs in India:
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Secured NCDs: These NCDs are backed by the company's assets, which act as collateral, providing an extra layer of safety for investors. In case of default, the debenture holders have a claim on the company's assets.
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Unsecured NCDs: Unlike secured NCDs, unsecured NCDs do not have any specific collateral backing. They are dependent solely on the company's creditworthiness. Due to the higher risk involved, unsecured NCDs often offer a higher interest rate.
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Convertible NCDs: Although distinct from traditional NCDs, convertible NCDs allow holders the option to convert their debentures into equity shares after a predetermined period. This provides investors with the potential for capital appreciation in addition to interest income.
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Callable NCDs: Callable NCDs offer the issuing company the right to call back the debentures before maturity, subject to certain conditions. This allows companies to take advantage of lower interest rates in the future but may not be favorable for investors.
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Non-Callable NCDs: Non-Callable NCDs, on the other hand, cannot be redeemed by the issuer before maturity. This provides investors with more certainty regarding their investment period.
NCDs play a pivotal role in the Indian financial market, serving as an essential tool for both companies seeking capital and investors searching for stable income opportunities. With fixed interest rates, regular interest payments, and a predefined maturity period, NCDs offer a range of benefits.
As investors consider their options, understanding the different types of NCDs available in India is crucial for making informed investment decisions. Whether one opts for secured or unsecured NCDs, or explores the potential of convertible NCDs, each type comes with its unique advantages and risk factors.
You can get Muthoot FinCorp Ltd. NCD’s on the Muthoot FinCorp ONE platform in three simple steps. All you have to do is download the Muthoot FinCorp ONE app from the Play Store, proceed to choose a series, fill in your DEMAT account details, add your UPI ID and submit the application. Yes, it is that easy.
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